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What are the government's rights with regard to contract termination?

The government has the inherent right to terminate entire contracts or, occasionally, portions of contracts (partial termination) for the government's convenience or because of contractor default. The CO is authorized to terminate contracts in accordance with standard contract termination clauses, which are required to appear in all government contracts. However, even though termination might be possible in a particular case, COs should terminate only when termination is in the best interest of the government.

Termination for convenience and termination for Default

What is termination for convenience, and when does it occur?

Termination for convenience occurs when the government requires the contractor to discontinue performance when a determination is made that completion of the work is no longer in its best interest. The government has the right to terminate without cause and to limit the contractor's recovery to:

Costs incurred

The profit on work done and

The cost of preparing a termination settlement proposal.

The recovery of anticipated profit is precluded when a contract is terminated for convenience.

Termination for convenience should be considered when:

Funds are insufficient to pay the full contract price

The requirement is no longer needed

The quantity of supplies or services needed has been reduced or

There has been a radical change in the requirement, and the requirement is now beyond the contractor's expertise.

What is a termination for default (or cause), and when does it occur?

Termination for default (or cause) occurs when the contractor fails to perform in accordance with the contract. The government should terminate a contract only when termination is in its best interest. A contract is terminated for default (or cause) when there is no other alternative for obtaining performance, given the current contractor's problems and deficiencies, and the government has a sustainable case for default termination.

The word default is traditionally used in government contracting for noncommercial item contracts in accordance with FAR Part 49.

Default is defined as "failure to discharge a duty,"[1] referring in this case to the contractor's failure to perform the noncommercial contract and the resultant termination of the contract by the government.

The word cause is normally used when terminating a commercial item contract in accordance with FAR Part 12. Cause is defined as "that which effects a result," referring in this case to the contractor's failure to perform the commercial contract and the resultant termination of the contract by the government.

What is a wrongful termination for default?

A wrongful termination for default occurs whenever a contract is improperly terminated for default. An improper termination may occur when there is an excusable delay or if proper notice of a possible termination is not given to the contractor. Such termination is converted to a termination for convenience, and the contractor can recover cost and profit on the work completed as of the effective date of termination.

What is forbearance?

Forbearance means the withholding of a default termination while the government decides whether or not to terminate a contract. Failure to terminate immediately does not necessarily waive the government's right to terminate. The government is allowed a period of time to investigate the facts and determine what course of action is in the best interest of the government. This period of time, however, must be reasonable, because the government's inaction can be considered by a court to constitute a waiver of the right to terminate if the time period is unreasonably long. There is no established time period that is considered reasonable for all cases; the length of time considered reasonable will depend on the facts and circumstances of each situation as judged by the court or a board of contract appeals.

  • [1] Steven H. Gifis, Barrons Dictionary of Legal Terms, 3rd ed. (Hauppauge, NY: Barrons Educational Services, Inc., 1998), p. 124
 
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